Sunday, January 27, 2013

Rare Consensus on Economic Growth

            When the Federal Reserve Bank of Philadelphia conducted a recent survey of economists about prospects for growth in 2013, the average guess was a gain in GDP of 2.3%.   More interestingly, there was very little deviation from this figure.  All of the predictions fell within a fairly narrow range.   At the bottom 25th percentile, that is, among those economists who were so pessimistic that only 25% predicted lower growth, the growth forecast was 2.1%. At the 75th percentile, that is, among those so optimistic that only 25% predicted a higher figure, the growth forecast was 2.5%   In only two of the last 45 years has there been so narrow a range of opinion among economists as to where the economy is heading.
            According to an article entitled "Economists Agree? Start Worrying," in the Jan 26-27 issue of The Wall Street Journal, the probable reason for this narrow range of outlooks is that, over the past five  years, we have heard a lot of stark warnings on where the economy was headed, predicting everything from runaway inflation to severe depression--but all of them were wrong.  So now,  the consensus view says we are probably going to get more of what we already have---continued  improvement, but at a fairly slow rate. 

Monday, January 21, 2013

New Ship for a New Kind of War?

                   There's an interesting article in the January issue of The Electrical Worker,  which is the house organ journal of the International Brotherhood of Electrical Workers.   The article is about a new warship being completed in a shipyard in Pascagoula, Miss.  The IBEW has a particular interest in this ship because large numbers of its local members, over 700  of them in IBEW local 733, found employment in constructing this ship. The article, "USS AMERICA, In a Class by Itself", explains that the USS America is the first of a new class of amphibious assault ships, a kind of ship that will make beach landings obsolete.
                  Beach landings, from the Greeks at Troy to Eisenhower at Normandy and McArthur at Inchon, have always been nasty, bloody affairs.  But the Navy is betting that in future wars, such landings will be unnecessary.  In future wars, invading marines will simply fly over the beaches in planes that can take off like helicopters and then fly like regular planes, escorted by jet fighters that can take off in a very short space and land vertically. This ship will carry no landing craft at all, nor would it be capable of launching them. This marks a radical departure from existing amphibious assault ships.
                  The  America also departs from conventional craft in other ways. It will have no boilers and use no steam power. All systems will be electric, including the propulsion system, and will be powered by two 4 mw diesel generators backed up by two 35,000 horsepower jet turbine generators.  The entire ship is a maze of  electrical cables and fiber optic links, installed over a 5 year period by hundreds of electricians. One question left unanswered is how, in these hypothetical future wars, equipment such as tanks, heavy trucks, and artillery pieces were to be hauled ashore.  Will future armies not need these things?  Yet one thing is clear.  There are a few countries in the world whose main importance to anyone is the fact that they would make a good beach-head, if such a beach-head were ever required.  The strategic usefulness of such places is now zero.  Think about it.

Saturday, January 12, 2013

Exporting Oil Without a Pipeline

            According to an article the December 29-30 issue of Wall Street Journal, "Disparity in Oil Prices Proves Pesky,"  Americans, particularly those living in the interior,  are now enjoying much lower oil prices than Europeans.  In Iowa, I just filled my tank with regular gasoline for $2.99 per gallon.  In some parts of America, prices are a bit higher, but all Americans have lower prices on petroleum and natural gas than anyone in Western Europe. Historically, the price for European crude oil (Brent Crude) is usually within a dollar or two per barrel of the price of American crude, (West Texas Intermediate).  But according to the article,  U.S. crude is now about $20.00 cheaper per barrel than European oil.
            The reason for this disparity is that we have a temporary glut of oil in the American interior due to shale oil produced by hydro-fracking.  This is temporary, in that the shale formations are shallow and will probably only produce for 10 or 15 years, as opposed to the 30-60 year life span expected for a conventional well.  But at the moment, this surge of production, combined with recent increases in the fuel efficiency of the American automobile fleet, means that there is more oil available than there are buyers, and this is driving down the price of crude.  This is bad news for the oil companies, because the new horizontal drilling and hydro-fracking technology that makes this production possible is extremely expensive. By some estimates, if the price of crude drops below $70.00 per barrel, which it easily could, the drillers won't even break even.
            The oil companies would like to sell this oil to the Europeans and get an additional $20.00.   But there is one problem--there is no practical way to get it there. This oil is produced in the northern mid-west, and the present pipeline capacity to ship this oil to gulf coast ports is inadequate to handle the volume.  In November 2011, the Seaway Pipeline, originally built to import oil from the gulf ports to the main storage hub in Cushing, Oklahoma, was re-fitted to pump oil in the other direction.   But this pipe can only handle about 400,000 barrels per day.  One part of the proposed Keystone pipeline, the Keystone XL Southern Leg, would increase this capacity by another 800,000 barrels.   Another Keystone leg would bring tar-sand oil from Alberta, Canada, into the U.S..   But the whole project has been plagued by delays and environmental concerns.   Ironically, the oil industry has been trying to paint the environmentalist opposition as obstructionists who are obstructing a pipeline that would bring in more oil and lower our prices. This propaganda effort has had some success---millions of morons are writing their congressmen demanding that this line be built.   But the part most likely to be completed is the Southern Leg, which will not bring in any oil but ship it out---which will raise prices.  And that's why the oil companies want to build it.  Along with oil, the new drilling is producing massive amounts of natural gas, which would be even harder to ship to Europe. But where there is a will,  there is a way.
            According to another WSJ article, "Kafkaesque Twist in U.S.-Europe Energy Gap", Dec 26, 2012,   Austrian steelmaker Voestalpine is planning to build a $659 million plant in the U.S. or Canada to produce a semi-refined iron product (hot briquetted iron) to be shipped back to Austria to be refined into steel.  The iron smelting done to produce these briquettes will be using cheap American natural gas instead of metallurgical grade coal.  American gas is now  priced at about $3.50 per million British thermal units--about a third of the European price.  Reducing iron from its ore is a very energy-intensive operation.  The fuel used, either natural gas or coke from coal, not only provides the heat but is the main chemical reagent in the process.  But by using cheap gas to produce an energy-intensive semi-finished product, they have found a way to export gas without a pipeline.  Amazing how history repeats itself.
            In Elizabethan England, the British isles were running short of chestnut trees, which was then the only source of charcoal suitable for reducing iron from its ore.   At that time, no one had yet developed a way to use coal to smelt iron. The trick is that you first have to change it to "coke", which is like charcoal, only made from coal.  But no one knew that then.  So the whole British iron industry was in peril.  But colonization of the Americas saved them.  North America had abundant chestnut forests, as well as iron ore.  The arrangement which the British preferred was to have the Americans make semi-finished iron to ship to England, which their own iron industry could turn into useful iron and steel consumer products which they could sell back to the Americans. But the Americans had a better idea:  instead of shipping this iron to England and then shipping consumer products back,  why not just turn the iron into consumer products right here in America?  Why accept low prices for our crude iron exports and pay high prices for all our consumer goods, and have all the money go to British shippers?  So we started making our own things.  To prevent this, Parliament passed the Iron Act.  Specifically, this act forbade anyone in the colonies from owning a "slitting mill."  A slitting mill  is a kind of shears that cuts red hot iron plates into narrow strips. Thick plates were not useful to anyone except an iron mill. They are a semi-finished industrial commodity.  But narrow strips could be sold to any blacksmith and converted into horse shoes, hinges, nails, or just about anything.  They were a consumer  good.
            The Iron Act was originally passed about 1750, but it was not enforced until after the French and Indian War was over. One cannot put a strangle hold on a population that one still needs to help win the war.   But after the war, a number of unpopular acts were enforced upon the colonials. The Stamp Act aroused the most ire among the working classes, but among the elites who actually planned the revolution, the most intolerable of all the so called "intolerable acts" was the Iron Act.  It clearly signaled the intention of the British government to insure that America would remain permanently under-developed industrially-- because British shippers and factory owners wanted it that way.  If we accepted these restrictions, we would remain a "third world country" forever.  So a decision was made to escape from British control while escape was still possible.
            Yet today, we cheerfully offer to the Austrians the precise arrangement which we fought a revolution to deny the British.

Saturday, January 5, 2013

Greetings to My Readers in Poland

            In the last few weeks, there has been a surge of interest in this blog from Poland.  For three weeks there have been more visits from Poland than from any other European country, and one week there were more visits from Poland than from all other European countries combined.
            It would be interesting to know just which articles are of interest in Poland, but the statistical information provided to me by Google tells me only the total number of visits to each article, and the total from each country.  To know who is visiting what--I can only guess.   My first guess is that my readers in Poland would like to have a view of the current world-wide economic debacle as seen from inside the U.S., where it all started.  But they are not such fools as to accept explanations from government officials, or from economists paid by business interests, or even from the academic community.  (In recent years, though colleges still pretend to be a free and independent voice,  most of them have become so dependent on grant money from business interests that academic economists now publish mostly whatever the business block would like to hear.   It is not that any dissenting professor would be fired--it is that since about 1970, anyone who would be likely to have a dissenting view would never have been hired in the first place. Except for labor organizations and a few newspapers,  there are few places in America to hire an economist today unless he is a robot who repeats the business block party line.  For example, the wealthiest 1% of Americans now control 5 times as much wealth as the bottom 80%, and yet many academic economists still repeat the business block line that taxes on the wealthy are too high. )   So while government economists are not allowed to tell you the truth, the business block economists are not even allowed to think it.  I spent 40 years as an electrician and during some of that time I was an elected union official and a labor union activist.  If you are from Poland, then you understand that such people are not easily silenced.
            I assume that my article about "Why Wall Street Wrecks the Economy" was one of the sites which had a wide audience in Poland.  But here are two others that you may find interesting.   One is labeled Does Keynesian Policy Still Work?  The other is  A Keynesian Error. Keynesian economics was the main engine of growth in America and much of Europe from the mid-1930s until recently.   In the post war years, the economic boom in Western Europe which many in Poland may have envied was all provided by Keynesian expansion. But by the time that Poland became free of the collectivist model, the opportunity to use Keynesian tactics was already closing, for reasons discussed in the article.  And today, it may be too late for Poland to feast at the table which fed its Western neighbors so well. But perhaps it is not too late, if it were done correctly. Here is the link to those articles: